The primary concept of strategic procurement is that through advanced planning, scheduling, and group buying initiatives, a firm can experience significant cost savings. In addition to hard dollar savings, there will be additional savings generated through a more efficient business operation and therefore increased profitability. The implementation of strategic procurement within a company requires focus on three procurement concepts: group buying, centralized procurement services, and using procurement data management systems.
The concepts in strategic procurement require communication and cooperation between the business unit and financial services and that procurement be implemented effectively. Even a simply concept, such as encouraging planned purchasing, can cause major operational issues if not discussed with the business unit. For example, a bakery may order dry goods each week, based on the planned work orders for that period. If the purchasing department decides that it is more cost effective to order these materials once every two weeks, the bakery will experience difficulties with storage, access, and loss prevention.
Group buying is the process of combining the total resource requirements for different departments within the company and issuing one standing purchase order. This single order is for a larger quantity than multiple smaller orders. Therefore, lower per unit costs can be negotiated with the supplier. If the departments are physically located in a range of buildings, the contract can stipulate the delivery windows, and address the issue of delivery costs. This practice is quite common in large firms, as part of an integrated strategic procurement business plan.
Administrative overhead is the cost to the organization for the entire procurement to pay cycle. This includes the salaries and support costs for procurement staff, invoice processing, check production, and resolving of vendor inquiries. An organized, managed process eliminates a significant amount of these costs, as they are incurred only once for every commodity. Centralized procurement staff can provide a greater level of support to the business units and ensure that policy is followed.
Procurement or purchasing management systems are often provided as part of large accounting software or enterprise resource planning solutions. This module is used to create purchase requisitions and purchase orders and their invoices and process goods receipts. In addition, the analysis and reporting tools built into this type of system allows the procurement department to manage the business process, determine overall costs to the institution, and identify potential savings opportunities. Reports can also be used to ensure policy compliance and as evidence in response to any legal challenge.